FinQuiz.com CFA Level I 2nd Mock Exam June, 2015 Revision Copyright © 2010-2015 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com CFA Level I Mock Exam – Solutions (PM) FinQuiz.com – 2nd Mock Exam 2015 (PM Session) Questions Topic Minutes 1-18 Ethical and Professional Standards 27 19-32 Quantitative Methods 21 33-44 Economics 18 45-68 Financial Reporting and Analysis 36 69-76 Corporate Finance 12 77-88 Equity Investments 18 89-94 Derivative Investments 95-106 Fixed Income Investments 18 107-112 Alternative Investments 113-120 Portfolio Management 12 Total 180 FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Solutions (PM) Questions to 18 relate to Ethical and Professional Standards Laura Elliot is a broker at Housegate, a broker-dealer firm She undertakes trades on behalf of clients with a high net worth She discovers that one of her clients has engaged in the embezzlement of portfolio funds, which classifies as an illegal activity under domestic trading regulations In order to comply with the CFA Institute Standards of Professional Conduct, Elliot’s preliminary course of action would be to: A request for a different assignment B report the violation to her supervisor C report the violation to regulatory authorities Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c Upon learning of the illegal client activity, Elliot’s initial course of action should be to stop the behavior by bringing it to the attention of her supervisor or the firm’s compliance department Should this prove unsuccessful, her next course of action would be to disassociate herself from undertaking trades on behalf of the client’s account In the absence of any regulations, members and candidates are not required to report violations to the concerned governmental or regulatory organizations Standard I (A), Knowledge of the Law, requires members and/or candidates to: A document a violation when disassociating themselves from an illegal activity B have detailed knowledge of all the laws that could potentially govern their activities C abide by the rules and regulations related to the administration of the CFA examination Correct Answer: C Reference: CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Solutions (PM) Standard I (A), Knowledge of the Law, requires candidates to abide by the rules and regulations related to the administration of the CFA examination Although members and candidates are required to understand the laws and regulations, which govern their professional activities, they are not required to become experts on or have detailed knowledge of all the laws that could potentially govern their activities The standard recommends members and candidates to document a violation when disassociating from an illegal or unethical activity; this is not a requirement The CFA Institute Code of Ethics requires members and candidates to: A encourage others to practice in a professional and ethical manner that will reflect credit on the profession B ensure the preservation of capital market integrity is given priority over protecting employer interests C use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities Correct Answer: A Reference: CFA Level 1, Volume 1, Study Session 1, Reading 1, LOS b Based on the CFA Institute Code of Ethics members and candidates must practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the investment profession Additionally, members and candidates must promote the integrity of and uphold the rules governing capital markets The requirement to place the importance of protecting market integrity before employer interest is required by the Standards of Professional Conduct as is the need to achieve and maintain independence and objectivity in professional activities FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Solutions (PM) In order to comply with the CFA Institute Standards of Professional Conduct relating to duties to employers, members and candidates: A should not enter into an independent business while still employed B are encouraged to recommend that their employers adopt and distribute a code of ethics C may obtain an assurance from a subordinate who has violated the Codes and Standards that the wrongdoing will not recur Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c To comply with the CFA Institute Standards of Professional Conduct relating to duties to employers, members and candidates are encouraged to recommend that their employers adopt and distribute a code of ethics to clients The standards not preclude individuals from entering into an independent business practice, which does conflict with the employer’s interest, while still employed as long as prior notification is made In a supervisory capacity, when a member or candidate discovers an employee has engaged in an illegal or unethical activity, (s) he should respond promptly by conducting a thorough investigation Simply obtaining assurances that the illegal activity will not reoccur is not sufficient Adequate compliance procedures should: A meet regulatory requirements B ensure supervisors not delegate their duties C be designed to anticipate every potential violation Correct Answer: A Reference: CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Solutions (PM) Adequate compliance procedures should meet regulatory requirements The standard concerning responsibility of supervisors permits individuals to delegate their supervisory duties but such delegation does not relieve them of their responsibility However, procedures cannot be designed to anticipate every potential violation, which is why such a requirement is not imposed by the Code and Standards Samantha Town is a portfolio manager at Wallace Associates situated in Dallas, Texas This year Town has delivered exceptional performance for one of her client’s accounts In exchange for the performance, her client has offered her two front row tickets to an opera as well as the opportunity to meet the stage cast after the show To ensure she does not violate the CFA Standards of Professional Conduct, Town’s best course of action would be to: A reject the offer B Inform her employer after attending the opera show C accept the offer after obtaining permission from all relevant parties Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c Standard I (B) Independence and Objectivity permits members and candidates to accept gifts, benefits, compensation from clients as long as the employer is informed either before or after accepting the gift Town’s best course of action would be to accept the offer as long as she informs her employer If notification prior to acceptance is not possible, members and candidates must inform their clients about prior acceptance of gifts or benefits FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Solutions (PM) Upon reviewing the materials received during the investigation of a professional conduct inquiry, a designated officer’s preliminary course of action would be to: A revoke the member’s CFA charter B suspend the member’s membership C propose a sanction which can be rejected by the member Correct Answer: C Reference: CFA Level 1, Volume 1, Study Session 1, Reading 1, LOS a After reviewing the materials obtained during a professional conduct investigation a designated officer will propose a disciplinary sanction, which can be accepted or rejected by the member If the sanction is rejected, the matter is referred to a hearing panel whose task is to determine whether a violation has occurred and, if so, what sanction should be imposed Which of the following is a desirable practice of a firm which has a firewall policy implemented for its research and investment banking divisions? A Prohibiting communication between research and investment banking personnel B Basing the research analyst’s compensation on a flat rate without any contingent bonuses C To improve the accuracy of investment analysis, investment banking personnel regularly review research reports prepared by analysts Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c A desirable element of a firewall system is that the compensation arrangement should minimize pressure on research analysts and reward independence and objectivity Compensation based on a flat fee rate will achieve this purpose FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Solutions (PM) While some firms go the extreme of prohibiting communication between research and investment banking personnel, this measure may not classify as a desirable element A more effective solution is control the flow of information across the wall by passing the information through a compliance department Providing investment-banking personnel with the authority to review, approve, disapprove, or otherwise make changes to research reports will undermine the independence and objectivity of an analyst and is not a desirable property Recommended written trade allocation procedures least likely include: A processing orders on a first-come, first-served basis B allocating trades for new issues by portfolio manager C giving all accounts participating in a block trade a weighted price based on their order value Correct Answer: A Reference: CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c Procedures for allocating trades to clients include: • • • 10 processing and executing orders on a first-in, first out basis; allocating trades for new issues by allocating securities by client rather than portfolio manager; and giving all accounts participating in a block trade the same execution price Joyce Parker is a portfolio manager serving East AM Associates Parker is calculating the return generated on one of her client’s accounts for the current fiscal year She calculates the net-of-fees return but does not subtract investment management fees rendering the calculated return noncompliant with the GIPS standards East AM Associates has complied with the GIPS standards since establishment even though local laws not mandate firms to so Is Parker in violation of the CFA Institute Standards of Professional Conduct? A Yes B No, she has not violated any law C No, failure to comply with the GIPS standards does not result in a violation of the Standards of Professional Conduct FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Solutions (PM) Correct Answer: A Reference: CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS b Parker is in violation of Standard III (D) Performance Presentation because she has falsely claimed compliance with the GIPS standards By misrepresenting performance information, Parker is in violation of the CFA Institute Standards of Professional Conduct 11 Ella Lawson is the chief executive at Rome Bank, a commercial banking enterprise On behalf of the bank Rome will be providing funding to a manufacturing enterprise seeking to expand its operations During her visit to the manufacturer’s factory, Lawson overhears two employees on the production floor discussing the likelihood of their employer’s inability to carry out expansion Lawson holds shares of the enterprise and decides to sell her holding and reject providing financial support Lawson is most likely in violation of the CFA Institute Standard of Professional Conduct relating to: A loyalty, prudence and care B diligence and reasonable basis C material, nonpublic information Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS b Lawson is in violation of the standard relating to diligence and reasonable basis This is because the discussion between the two production employees and any information shared is not credible enough to base her investment decision on Given that these individuals lack seniority, it is less likely they have access to confidential information Therefore basing her financing and share disposal decisions on information, which is not credible will result in a decision, which lacks a reasonable and adequate basis FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Solutions (PM) Lawson is not in violation of the standard concerning material nonpublic information The specificity of the information, the extent of its difference from public information, its nature, and its reliability are key factors in determining whether a particular piece of information is material; the less reliable information is, the less likely it is to be material As discussed above, the fact that the production employees are discussing a strategic issue whose likelihood of occurrence is uncertain makes the information nonmaterial 12 Gus Horace is a real estate advisor situated in a developing country Horace is attempting to sell agricultural land, on behalf of the landowner, to a restaurant chain seeking to grow its own produce The land lies parallel to a river where industrial waste is frequently dumped In marketing the land to the potential client Horace states, ‘This s a purchase you will not regret You should more than likely expect to enjoy a healthy crop in your first year of farming.’ Horace does not disclose the fact that the original landowner is an acquaintance of his Horace is most likely in violation of the standard relating to: A fair dealing B misconduct C loyalty, prudence and care Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS b Horace is in violation of the standard relating to misconduct This is because she has been dishonest regarding the condition of the land being sold Horace is also in violation of the standard relating to disclosure of conflicts by failing to disclose her relationship with the land’s owner Her independence and objectivity as a real estate advisor may be impaired due to her relationship with the seller There is no evidence to indicate that the standard relating to fair dealing has been violated FinQuiz.com © 2015 - All rights reserved 10 CFA Level I Mock Exam – Solutions (PM) 98 An investor purchases a five-year, 6% annual-coupon payment bond at 89.4535 and sells it in four years Following the purchase of the bond and prior to the receipt of the first coupon, interest rates go down to 8.5% The realized yield on the bond investment is closest to: A 3.77% B 5.79% C 8.71% Correct Answer: A Reference: CFA Level I, Volume 5, Study Session 16, Reading 55, LOS a The future value of the reinvested coupons at 8.5% is 27.2371 per 100 of par value [6 × (1.085)3] + [6 × (1.085)2] + [6 × (1.085)1] + = 27.2371 The sales price of the bond is 76.4869 per 100 of par value: 106 = 76.4869 *1.085The total return is 103.7240 (76.4869 + 27.2371) and the realized yield is 8.71% 89.4535 = 103.7240/(1 + r)4 r = 0.03770 99 An 8.0% semi-annual coupon payment bond has an eight year maturity and is priced to yield 9.5% The money duration and modified duration of the issue is 7.3524 and 5.3515, respectively The full price of the issue is 106.35 Ignoring the effects of convexity, the revised full price of the issue if yields increase by 125 basis points is closest to: A $96.58 B $99.24 C $116.12 Correct Answer: A FinQuiz.com © 2015 - All rights reserved 67 CFA Level I Mock Exam – Solutions (PM) Reference: CFA Level I, Volume 5, Study Session 16, Reading 55, LOS h ∆AB C = −DEFGHIJ, × ∆KLGMN ∆AB C = −7.3524 × 0.0125 = - 0.091905 or – 9.1905% New full price = 106.35 × (1 – 0.091905) = 96.5759 100 Which of the following issues has the highest seniority ranking in the event of default? A Subordinated B Senior unsecured C Senior subordinated Correct Answer: B Reference: CFA Level I, Volume 5, Study Session 16, Reading 56, LOS b In terms of seniority ranking, senior unsecured debt holders have the highest priority claims followed by senior subordinated and finally subordinated debt holders FinQuiz.com © 2015 - All rights reserved 68 CFA Level I Mock Exam – Solutions (PM) 101 ABC Inc has invested in a 5-year convertible bond issue trading at a price of $1,050 The issue is convertible into the issuer’s common shares at an exercise price of $40 The exhibit demonstrates the price of the issuer’s stock over a five day term Exhibit: Issuer Stock’s Price per Share Day Price ($) 36 32 42 40 34 Conversion parity will occur on Day: A B C Correct Answer: B Reference: CFA Level I, Volume 5, Study Session 15, Reading 51, LOS f On day 3, conversion parity will occur This is because conversion value ($1,050) will equal to the convertible’s bond price ($1,050) Conversion parity occurs if conversion value = bond price Conversion value = Current share price × conversion ratio Conversion ratio = $1,000/$40 = 25 Conversion value (Day 1) = $36 × 25 = $900 Conversion value (Day 3) = $42 × 25 = $1,050 Conversion value (Day 4) = $40 × 25 = $1,000 FinQuiz.com © 2015 - All rights reserved 69 CFA Level I Mock Exam – Solutions (PM) 102 Which of the following characteristics are unique to partially amortized bonds? A Balloon payment at maturity B Entire payment of principal occurs at maturity C Periodic payments of interest and principal repayments based on a schedule Correct Answer: A Reference: CFA Level I, Study Session 15, Reading 51, LOS e A partially amortized bond makes fixed periodic payments until maturity but only a portion of the principal is repaid by the maturity date Thus, a balloon payment is required at maturity to retire the bond’s outstanding principal amount A bullet bond does not call for any principal repayments over the life of the bond Instead, the entire payment of principal occurs at maturity 103 Which of the following coupon payment structures will allow investors to benefit from an increase in interest rates? A Plain vanilla bonds B Floating rate notes (FRNs) C Inverse FRNs Correct Answer: B Reference: CFA Level I, Volume 5, Study Session 15, Reading 51, LOS e FinQuiz.com © 2015 - All rights reserved 70 CFA Level I Mock Exam – Solutions (PM) The coupon rate offered on FRNs is directly linked to the interest rate Therefore, an increase in interest rate will increase the interest income received by investors Plain vanilla bonds offer a fixed coupon rate Therefore, an increase in interest rates will decrease the value of the bond and result in no change in income earned by the investor The coupon rate offered on inverse FRNs is inversely related to the interest rate Therefore an increase in interest rates will reduce the coupon rate and consequently the interest income earned by bond investors 104 A company has issued a 15-year bond with a notional principal of $350 million The sinking fund provision calls for 8% of the outstanding principal amount to be retired in years 8-14 with the outstanding balance paid off at maturity in 15 years The outstanding principal balance at the end of Year is closest to: A $294.00 B $296.24 C $322.00 Correct Answer: B Reference: CFA Level I, Study Session 15, Reading 51, LOS e The exhibit below demonstrated the sinking fund provision schedule for the first years of the bond issue: Year to Outstanding Principal at the Beginning of the Year ($ millions) Sinking Fund Payment ($ millions) 350.00 350.00 322.00 0.00 28.00 25.67 FinQuiz.com © 2015 - All rights reserved Outstanding Principal at the End of the Year ($ millions) 350.00 350.00 322.00 296.24 71 CFA Level I Mock Exam – Solutions (PM) 105 Which of the following issues is most likely classified as a domestic bond? A A French company issues Euro-denominated bonds in Germany B A U.S company issues U.S dollar denominated bonds in Canada C A Swedish company incorporated in Japan issues Yen denominated bonds in Japan Correct Answer: C Reference: CFA Level I, Study Session 15, Reading 51, LOS d Bonds issued by companies that are incorporated in that country are called domestic bonds Out of the three options presented, the bonds issued by the Swedish company classify as domestic bonds 106 A four-year 6% semiannual coupon payment corporate bond is priced at 110 per 100 of par value Its yield to maturity is 7.87%, quoted on a semiannual basis The annual rate of the bond that can be used for direct comparison with otherwise comparable bonds that make quarterly coupon payments is closest to: A 7.79% B 8.02% C 15.74% Correct Answer: A Reference: CFA Level I, Volume 5, Study Session 15, Reading 53, LOS f 1+ O O " = 1+ PQRS " APR4 = [(1.0802)1/4 – 1] × = 7.794% FinQuiz.com © 2015 - All rights reserved 72 CFA Level I Mock Exam – Solutions (PM) Questions 107 to 112 relate to Alternative Investments 107 At the beginning of the year 2012, Gus Knight invested $100,000 in a hedge fund with a “1 and 10” fee structure The value of the fund at the end of the year rises to $135,000 and by 5% at the end of 2013 Management and incentive fees are paid at the end of the year and are calculated independently In the year a fund’s net value declines, incentive fees are not be paid The hedge fund’s high water mark at the end of 2013 is closest to: A $135,000.0 B $135,150.0 C $136.657.5 Correct Answer: C Reference: CFA Level 1, Volume 6, Study Session 18, Reading 60, LOS f Beginning of year: Management fees = $135,000 × 1% = $1,350 Incentive fees = ($135,000 – $100,000) × 0.10 = $3,500 Value of capital at beginning of year = $135,000 – $1,350 – $3,500 = $130,150 End of year: Value of capital at end of year = $130,150 × 1.05 = $136,657.50 In 2013, the value of the fund at the end of the year is greater than its beginning value Therefore, the high water mark is established at $136,657.50 108 A drawback of investing in funds of hedge funds most likely includes: A diluted returns B longer lockup periods C difficulty in conducting due diligence Correct Answer: A FinQuiz.com © 2015 - All rights reserved 73 CFA Level I Mock Exam – Solutions (PM) Reference: CFA Level 1, Volume 6, Study Session 18, Reading 60, LOS e A drawback of the multi-layered fee structure associated with funds of hedge funds is the net-of-fees returns are diluted to the investor Benefits of investing in this hedge fund category include shorter lockup periods Additionally, funds may provide expertise in and conduct due diligence in selecting the individual hedge funds The Alternative Investment section in the PM session is one question short Kindly add the following question: 109 A key risk cited for investing in alternative investments includes: A limited redemption availability B concentrated portfolio positions C reduced diversification potential Correct Answer: A Reference: CFA Level 1, Volume 6, Study Session 18, Reading 60, LOS d A risk cited for investing in alternative investments includes limited redemption availability and transparency, low liquidity and the challenge of manger diversification Alternative investments have a low correlation with traditional asset classes making this a benefit 110 Which of the following real estate indices will most likely result in a sample selection bias? A REIT index B Appraisal index C Repeat sales index Correct Answer: C FinQuiz.com © 2015 - All rights reserved 74 CFA Level I Mock Exam – Solutions (PM) Reference: CFA Level 1, Volume 6, Study Session 18, Reading 60, LOS d Repeat sales index suffer from a sample selection bias because the properties that’s ell in each period vary and may not be representative 111 An analyst is calculating the one year price of a commodity futures contract with the following characteristics: Spot price Convenience yield Storage costs Risk free rate (Rf ) = 5% $80.96 $5.50 $7.80 The price of a one year commodity future contract is closest to: A $82.71 B $83.26 C $87.31 Correct Answer: C Reference: CFA Level 1, Volume 6, Study Session 18, Reading 60, LOS d Future Price = Spot Price (1+Rf) + Storage Cost – Convenience Yield Future Price = $80.96 (1+5%) + $7.8 - $5.5 = $87.31 112 Which of the following is most likely the motivation for a passive investor buying commodities for his portfolio? A Speculation B Risk taking opportunity C Risk diversification benefits Correct Answer: C Reference: CFA Level 1, Volume 6, Study Session 18, Reading 60, LOS d FinQuiz.com © 2015 - All rights reserved 75 CFA Level I Mock Exam – Solutions (PM) A passive investor buy commodities for his portfolio for the risk diversification benefits A passive investor generally invest through a collateralized position in a future contract FinQuiz.com © 2015 - All rights reserved 76 CFA Level I Mock Exam – Solutions (PM) Questions 113 to 120 relate to Portfolio Management 113 Which of the following statements best describes the major drawback of the top down investment approach? A This approach involves high active risk B This approach involves high trading cost C Major portion of the portfolio is invested passively Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 12, Reading 44, LOS g In top down investment process different managers manage the same client’s portfolio, therefore trading costs are incurred by different managers The higher the trading, the higher the tax expense associated with the realized capital gains 114 Which section of the investment policy statement provides description regarding the custodian of the client’s assets? A Introduction B Investment guidelines C Statement of duties and responsibilities Correct Answer: C Reference: CFA Level 1, Volume 1, Study Session 12, Reading 44, LOS b Option C is correct Statement of duties and responsibilities section provides description regarding the duties and responsibilities of the client, the custodian of the client’s assets and the investment managers 115 Which of the following characteristic best describes an ETF? A Low initial investment B No uncertainty in price C No cash flows during the investment period FinQuiz.com © 2015 - All rights reserved 77 CFA Level I Mock Exam – Solutions (PM) Correct Answer: A Reference: CFA Level 1, Volume 1, Study Session 12, Reading 41, LOS e In case of ETF, dividends are paid out to the share holders so there is a direct cash flow from ETF ETFs are subject to price uncertainty as they are traded at the prevailing market price, which changes 116 Recourse Associates is an investment management firm located in the U.S Bailey Gibbons is a portfolio manager serving the firm Gibbons is managing the Global Developing Market Equity Fund (GDMEF) at Recourse The assets under management and the net returns generated by the fund over the previous three years are summarized in an exhibit The applicable tax rate is 30% and inflation is expected to remain stable at a rate of 1.5% Net returns are prior to considering the effects of taxes and inflation Exhibit: Information Concerning the GDMEF (Years 1-3) Assets Under Management at the Year Beginning of the Year ($) Net Return (%) 10 million 15 million 18 million The real after-tax return of the fund in Year is closest to: A 1.97% B 2.41% C 3.50% Correct Answer: A Reference: CFA Level 1, Volume 1, Study Session 12, Reading 42, LOS a FinQuiz.com © 2015 - All rights reserved 78 CFA Level I Mock Exam – Solutions (PM) The after-tax nominal net return is 3.5% [5% - (5% × 0.3)] The after-tax real return is (1+ 3.5%)/(1 + 1.5%) – = 1.97% Taxes are paid before incorporating the effects of inflation 117 Mark Taylor is an equity investor who has recently purchased the stock of a Kenyan enterprise The risk-free rate of return in Kenya is 4.5% while the expected return on the market index is 7.2% The correlation of the stocks purchased with the market index has recently increased from 0.6 to 0.8 and the standard deviation of the stock and market index is 25.7% and 16.4% respectively The expected return on the Kenyan stock is closest to: A 5.88% B 7.88% C 13.53% Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 12, Reading 43, LOS g Bi = p i , mσ i σm = 0.8 × 0.257 = 1.2537 0.164 E(R)I = 4.5% + 1.2537(7.2% – 4.5%) = 7.88499% 118 Maya Thomas is an independent equity investor who has undertaken an investment in a Brazilian coffee manufacturer’s stock The covariance of the manufacturer’s stock with the market index and market variance is 0.01577 and 0.01360 respectively Thomas can most likely anticipate earning a return on her equity investment that is: A less than the risk-free rate B less than the market return C greater than the market return Correct Answer: C FinQuiz.com © 2015 - All rights reserved 79 CFA Level I Mock Exam – Solutions (PM) Reference: CFA Level 1, Volume 1, Study Session 12, Reading 43, LOS e The beta of the stock is 1.1596 (0.01577/0.01360) A beta greater than 1.00 implies that the expected return on the stock is higher than the market return A positive beta indicates that the required return will be greater than the risk-free rate 119 With different borrowing and lending rates, the slope of the CML will become: A curved to the left of the market portfolio B kinked to the right of the market portfolio C less steep to the right and left of the market portfolio Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 12, Reading 43, LOS b With different borrowing and lending rates, the slope of the CML will become kinked beyond the point representing the market portfolio; beyond this point the graph will have a smaller slope The portion of the CML to the left of the market portfolio will continue to be represented by a straight line 120 Writing an investment policy statement (IPS) is important because it: A is recommended by codes of corporate governance B can be used as a basis to determine the suitability of an investment C allows identification of any conflict between a client’s objectives and constraints Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 12, Reading 44, LOS a FinQuiz.com © 2015 - All rights reserved 80 CFA Level I Mock Exam – Solutions (PM) An investment policy statement is important because it allows managers to determine the suitability of an investment based on the client’s recorded objectives and constraints It is important that the client’s objectives are consistent with his/her constraints in the IPS FinQuiz.com © 2015 - All rights reserved 81 ... return data for the years 20 00 to 20 04 Exhibit: Stock and Bond Return Data 20 00 -20 05 Stocks (%) Bonds (%) 20 00 7.4 10.1 20 01 - 5.6 3.4 20 02 3.7 - 1.1 20 03 9.3 7.9 20 04 14.7 12. 8 The time series mean.. .CFA Level I Mock Exam – Solutions (PM) FinQuiz.com – 2nd Mock Exam 20 15 (PM Session) Questions Topic Minutes 1-18 Ethical and Professional Standards 27 19- 32 Quantitative Methods 21 33-44... change in real GDP Between 20 10 and 20 12 this growth is (4% /2% )0.5 – = 1.41% or 41.4% FinQuiz.com © 20 15 - All rights reserved 24 CFA Level I Mock Exam – Solutions (PM) 35 Based on an analysis